The march toward record new issuance continues. The 30-day supply set a new record during the month and indications from the street suggest we can expect good supply until mid-December. This provides investors an opportunity to put cash to work or execute income enhancement trades. We had the privilege to attend a large adviser conference last week and see the world from the eyes of those who make asset allocation and investment decisions for their clients on a daily basis. In this month’s credit review, I will share with you what they think is going to happen with rates, where you should be investing your fixed income allocation, and what is going on with the World and US economy. The municipal market continues to gag on supply and has followed the US Treasury market higher in rates over the last 30 days. We think the high supply story will continue and that value will still be available in munis for at least the next 30 days. Highlights for October are as follows:
- Muni yields were up 11 to 25 bps, with the curve steepening for the first time since June.
- Taxable yields were up 12 to 25 bps, as the market is pricing in a Fed rate hike in December and higher prospects for inflation.
- Issuance remains a big factor, as munis approach year-end. It looks like we may be setting a new high for issuance since 1986, surpassing 2010’s Build America Bond influenced levels. More specifically:
- Issuance in the month of October was 55% higher than issuance volume in October 2015.
- Year-to-date issuance is running at 10% higher than 2015. The largest growth is in new money which is up 18%, as infrastructure spending is finally picking up.
We encourage investors to take advantage of this year-end opportunity to put cash to work or make tax-loss swaps. We are also encouraging investors to review their portfolio for prerefunded bonds. They are a good source of funds that can be sold, with the proceeds utilized to make new purchases and improve your portfolio’s income.
The big three states (California, Texas and New York) are responsible for over 37% of year-to-date issuance in 2016. When including Pennsylvania, Florida and Illinois, you now account for over 50% of issuance totals in 2016. One of the big concerns with the unfunded pension problems for most states, other than the large liabilities, is unreasonable return assumptions on the investment portfolio. In the last year, there have been 11 states that have adjusted their pension return assumptions lower to try and make projected returns more reasonable. Unfortunately, on average, this reduction in estimated returns went from 7.75% to 7.25%. While we commend them for actually decreasing their assumptions, there is still a long ways to go to reach a more realistic 5% number. It’s voting week, and there are a lot of state referendums on the ballots throughout the USA. One item that is growing in popularity and will be voted on in numerous states is “tax triggers”. A tax trigger is a legal device that, based on the state meeting certain revenue targets, conditions change in taxes – usually in the form of tax refunds. It is a way to allow states to provide tax relief to residents when the state is doing well. More specifically, it keeps the state from feeling the pressure to decrease tax rates in times of revenue growth, and then turn around and raise them again in times of need. Several states’ that have already adopted some form of tax triggers are: Colorado, Michigan, Massachusetts, and North Carolina.
This material has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation to buy or sell. The information herein was obtained from sources which Mainline West Municipal Securities LLC, a member of FINRA and SIPC, and its suppliers believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any securities. Any prior investment results presented herein are provided for illustrative purposes only and have not been verified by a third party. Furthermore, any hypothetical or simulated performance results contained herein have inherent limitation and do not represent an actual performance record. Actual factual performance will likely vary and may vary sharply from such hypothetical or simulated performance results. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal bond securities before investing. More information about municipal bond securities is available in the issuer’s official statement or can be found at http://emma.msrb.org.